North Sea Royalty Idea Paying Off

Once
upon a time the mere mention of an independent staking a claim in
an offshore province would have elicited laughter from the E&P
community — especially in the environmentally intimidating North
Sea.

But that
was then, this is now.

It's the
usual scenario where the big folks drill the big finds and then
move on to begin again elsewhere, leaving the supposedly smaller
stuff for others. Depending on who's talking, the North Sea leftovers
might include 30 to 50 billion barrels of hydrocarbons waiting to
be tapped.

Larger
independents such as Apache, Burlington and long-time North Sea
player Kerr-McGee are among the names having a current stake in
the action.

Given the
major discovery at the Brenda Field early this year by Calgary-headquartered
Oilexco North Sea Ltd. — which has a 10-person staff — opportunities
apparently are rife for even the smallest companies who are chasing
new finds using the latest 'n greatest approaches, techno-wise.
These include such heavy-duty applications as GX Technology's (GXT)
gridded tomography package and the PGS Mega Merge — a regional
3-D data set across producing areas of the North Sea.

In fact,
startups are being formed with a sole focus on E&P opportunities
in the North Sea.

Newbie Heavyweights

One of
these newbies is publicly-traded Endeavour International, which
was created via the merger of a shell corporation formed in 2003.
The new Houston-based company might best be called an independent
spin-off of an independent given the background of the two founders:
AAPG member John Seitz (Upcoming APPEX
luncheon speaker), formerly the head honcho at Anadarko, and
William Transier who reigned over the finances at Ocean Energy,
nee Devon, as chief financial officer.

The duo
quickly assembled a staff, including former management team members
from Anadarko and Ocean Energy, and hit the ground running.

"We felt
the new PGS Mega Merge would serve us well," Seitz said, "so we
negotiated access to that data set with PGS for a piece of our North
Sea New Ventures, which was set up prior to Endeavour."

Once
upon a time the mere mention of an independent staking a claim in
an offshore province would have elicited laughter from the E&P
community — especially in the environmentally intimidating North
Sea.

But that
was then, this is now.

It's the
usual scenario where the big folks drill the big finds and then
move on to begin again elsewhere, leaving the supposedly smaller
stuff for others. Depending on who's talking, the North Sea leftovers
might include 30 to 50 billion barrels of hydrocarbons waiting to
be tapped.

Larger
independents such as Apache, Burlington and long-time North Sea
player Kerr-McGee are among the names having a current stake in
the action.

Given the
major discovery at the Brenda Field early this year by Calgary-headquartered
Oilexco North Sea Ltd. — which has a 10-person staff — opportunities
apparently are rife for even the smallest companies who are chasing
new finds using the latest 'n greatest approaches, techno-wise.
These include such heavy-duty applications as GX Technology's (GXT)
gridded tomography package and the PGS Mega Merge — a regional
3-D data set across producing areas of the North Sea.

In fact,
startups are being formed with a sole focus on E&P opportunities
in the North Sea.

Newbie Heavyweights

One of
these newbies is publicly-traded Endeavour International, which
was created via the merger of a shell corporation formed in 2003.
The new Houston-based company might best be called an independent
spin-off of an independent given the background of the two founders:
AAPG member John Seitz (Upcoming APPEX
luncheon speaker), formerly the head honcho at Anadarko, and
William Transier who reigned over the finances at Ocean Energy,
nee Devon, as chief financial officer.

The duo
quickly assembled a staff, including former management team members
from Anadarko and Ocean Energy, and hit the ground running.

"We felt
the new PGS Mega Merge would serve us well," Seitz said, "so we
negotiated access to that data set with PGS for a piece of our North
Sea New Ventures, which was set up prior to Endeavour."

The company
was an active participant in the 22nd UK offshore licensing round,
and is now awaiting the results, which are due by early August.

"Depending
on how many awards we receive, this would give us the nucleus of
an exploration portfolio," Seitz said. "We've identified ready-to-drill
prospects as well as leads that require added technical work —
typically seismic or geologic analysis — that we can mature into
drillable prospects.

"We're
also looking for acquisitions, both asset and corporate, that would
make sense and establish some cash flow," he added.

Although
the Norwegian continental shelf is deemed promising, the barriers
to entry for the independents are lower in the UK North Sea, according
to Irene Haas, senior vice president institutional research at Sanders
Morris Harris, who recently completed a research report on the North
Sea and the influx of North American producers.

For instance,
there's the fallow fields program administered by the UK Department
of Trade and Industry (DTI), which requires operators to relinquish
acreage where there's been no activity for four years and none planned
for the future.

This opens
the door to others to acquire licenses where wells have been drilled
and orphaned and where discoveries perhaps have been made, making
them attractive to a new licensee for many reasons, including reduced
risk.

Smart Moves

Oilexco
went after a number of licenses of that ilk in the 20th licensing
round in 2002. The company was awarded a license where Conoco had
drilled a well in 1990 that tested 2,690 barrels per day.

"This was
a delineation well, you might say, from the one drilled by Sun in
the next block that tested 3600 barrels a day and a little water,"
said Rod Christensen, chief geologist at Oilexco. "The oil/water
contact was different in the two wells, and we weren't sure if we
had a little structural play or something bigger.

"We purchased
3-D shot by Conoco in 1993, and GXT reprocessed essentially 300
square kilometers," he added. "They threw everything at it they
could do, including state-of-the-art pre-stack depth migration,
things that companies normally don't do in this Paleocene trend."

The first
well in the newly-dubbed "Brenda Field"
spudded last December, 150 meters from the Conoco well. It encountered
75 feet of section with 42 feet of sand and was heralded as the
biggest discovery in the North Sea since the 2001 discovery of Buzzard
Field. Three wells and several sidetracks have now been drilled
in the field, which proved to be a stratigraphic accumulation.

This was
the company's first-ever offshore experience, and Christensen noted
they relied on boutique-type groups in the UK to bring the drilling
expertise to the table — and he strongly encourages other independents
to do likewise.

"You pay,"
he said, "but it's smarter to use local expertise. We think Brenda
may have 200 million barrels of resources recoverable, and we hope
to have first production by October 2005, which is an unusual timetable
considering Buzzard was found in 2001 and still isn't producing.

Oilexco
took advantage of the DTI's Promote Licenses, which Haas noted are
particularly interesting to new entrants. They carry a four-year
initial term with a two-year decision point in which to drill or
drop the license. The awardee is not the highest bidder. Instead,
each interested party presents a work program designed to convince
the DTI of its merit via innovative ideas and new play concepts,
Haas said.

"As part
of the licensing round, we had to convince the British government
we were a viable candidate to receive a license," Christensen said.
"We brought GXT in because we promised the government we would purchase
seismic already shot and reprocess it … we had a list of things
we wanted to do with it.

"Because
it's more of a work commitment there, if two or three companies
want in on a license, the DTI will say you have to share certain
percentages, and one will operate," Christensen said. "This can
make for strange bedfellows, and sometimes nothing happens as a
result.

"We told
the DTI we didn't want to be randomly assigned partners," he said,
"and we got three different licenses all at 100 percent. I think
they understand that if they're going to bring new companies in,
they have to have the latitude to find their own partners."

New Kids
on the Block

Because
independents who are experienced in Promote License activity already
understand the North Sea geology and have the know-how to compete
for the licenses and drill, they provide an opportunity for newcomers
to gain a foothold quickly.

"We acquire
licenses to explore where we have identified exploration and development
opportunities," said Miles Newman, exploration director at Aberdeen-based
Reach Exploration. "We seek partners to assist in exploring these
areas, and my view is we can provide accelerated entry into the
North Sea for potential new participants with our drill-ready opportunities."

It appears
there may be a growing number of new folks coming onto the scene.

"I think
I saw 30 new entrants I had never heard of bid on licenses in the
22nd round," Christensen said. "The main areas they're coming from
are Canada, the U.S. and the UK."

"I think
as opportunities in the Gulf of Mexico diminish, we'll see a series
of North American independents transferring their efforts to the
North Sea," Seitz said. "If oil prices role back, we'll see more
of the majors divesting assets because they're not paying a lot
of attention to them."

Sure, there
are obstacles to surmount such as weather conditions that demand
special equipment, how to quantify abandonment liabilities, etc.
Even so it's getting to be an increasingly better deal as time goes
by.

"Under
the new royalty scheme, you pay no royalty tax on offshore production,"
Christensen said, "so the only tax you pay is corporate. The UK
government has done a lot to enable new oil search to be a lucrative
thing for new companies coming in.

"This is
probably the best royalty regime in the world," Christensen said.

Indeed,
staunch support by an array of governments for North Sea E&P
activity is particularly noteworthy given the continuing fierce
opposition overall to drilling in most parts of the United States.

"It's safe
in the North Sea in the sense of sanctity of the contract and the
ease of doing business," Seitz said. "You have regulatory bodies
and governments that want new energy supplies to be developed and
discovered because it makes economic sense for them.

"That and
having a partner to work with in the sense of regulatory bodies
and host governments is a great aid to any company," Seitz said.
"It's a partnership."